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When Do Loan and Bond Prepayments Pay Off?

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  • Edwin O. Fischer

    (Institute of Finance, Karl-Franzens-University Graz)

  • Ines Wöckl

    (Institute of Finance, University of Graz)

Abstract

For ten years interest rates in the Eurozone have been declining. This has created a situation where loan or bond prepayments and subsequent refinancing transactions are potentially beneficial for debtors. The advantageousness depends on the costs induced. We analyze the favorability of debt restructuring using the method of differential investment and provide critical limits for the nominal interest rate of the new loan up to which prepayment is optimal. The calculations address both fixed and variable rate loans and consider whether the debt agreement is repaid at maturity or in annuities.

Suggested Citation

  • Edwin O. Fischer & Ines Wöckl, 2018. "When Do Loan and Bond Prepayments Pay Off?," Working Paper Series, Social and Economic Sciences 2018-02, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    • Handle: RePEc:grz:wpsses:2018-02
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    File URL: https://static.uni-graz.at/fileadmin/sowi/Working_Paper/2018-02_Fischer_Woeckl.pdf
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    References listed on IDEAS

    as
    1. Helmut Staab & Peter Staab, 2014. "Kreditvertrags- und Kreditsicherungsrecht," Springer Books, Springer, edition 127, number 978-3-658-02065-1, June.
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    Cited by:

    1. Edwin O. Fischer & Lisa-Maria Kampl & Ines Wöckl, 2019. "On the Valuation and Analysis of Risky Debt: A Theoretical Approach Using a Multivariate Extension of the Merton Model," Working Paper Series, Social and Economic Sciences 2019-02, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.

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